The instability of the interface between chronically implanted neuroprosthetic devices and neural tissue is a major obstacle to the long-term use of such devices in clinical practice. In this study, we investigate the feasibility of polyethylene glycol (PEG)-containing polyurethane (PU) hydrogel as coatings for polydimethylsiloxane (PDMS)-based neural electrodes in order to achieve a stable neural interface. The influence of PU hydrogel coatings on electrode electrochemical behaviour was investigated. Importantly, the biocompatibility of PU hydrogel coatings was evaluated in vitro and in vivo. Changes in the electrochemical impedance of microelectrodes with PU coatings were negligible. The amount of protein adsorption on the PDMS substrate was reduced by 93% after coating. Rat pheochromocytoma (PC12) cells exhibited more and longer neurites on PU films than on PDMS substrates. Furthermore, PDMS implants with (n = 10) and without (n = 8) PU coatings were implanted into the cortex of rats and the tissue response to the implants was evaluated 6 weeks post-implantation. GFAP staining for astrocytes and NeuN staining for neurons revealed that PU coatings attenuated glial scarring and reduced the neuronal cell loss around the implants. All of these findings suggest that PU hydrogel coating is feasible and favourable for neural electrode applications.